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China Targets Hong Kong Wealth Gap, Housing Woes After Political Purge

By Keith Zhai and Chun Han Wong 

After quashing opposition groups in Hong Kong, China's leaders plan to target the city's yawning wealth gap and lack of affordable housing that Beijing blames for fueling social unrest.

Senior officials are discussing ways to broaden the city's tax structure and increase land supply in an effort to mitigate inequality and high living costs in one of the world's most expensive cities, according to people familiar with the discussions. The deliberations could lead to far-reaching overhauls of Hong Kong's economic and social-welfare systems, although specific proposals haven't been put forward, the people said.

Changes to Hong Kong's low-tax system would raise revenue for more social spending, but one challenge is how to do so without undermining the city's attractiveness as a financial and business hub. Land-policy reforms can help improve access to cheaper homes, although officials must overcome the entrenched influence of local property tycoons whom Beijing regards as too passive in their support of government goals.

For Beijing, efforts to curb dissent in Hong Kong over the past year -- from rounding up opposition figures on national-security charges to a planned revamp of the city's electoral system -- are meant to pave the way for social and economic overhauls. The political crackdown has drawn flak mainly from Western governments, which accused China of violating its pledges to allow Hong Kong's governance to remain semiautonomous until at least 2047.

What Beijing ultimately wants to address in Hong Kong is "not the politics, but the deep-seated issues" including the lack of affordable housing and the city's "deeply polarizing income gaps," said Bernard Chan, a member of China's national legislature and Hong Kong's cabinet.

Chinese Vice Premier Han Zheng and other senior officials have told pro-Beijing politicians from Hong Kong that local authorities must resolve fundamental social issues that they believe spurred political unrest in recent years, Mr. Chan said. "They want us to fix it," he said.

Opposition politicians are skeptical that Beijing can overcome the decades of policy inertia and infighting that beset Hong Kong's political and business elite, even if who the Communist Party defines as "true patriots" are put in charge.

"These patriots are probably also people with vested interests. They don't know the problems of the poor," said Emily Lau, a former chairwoman of Hong Kong's Democratic Party who was a local legislator for a quarter-century.

Beijing has long been aware of Hong Kong's social inequities, but, "They never bothered to solve it," Ms. Lau said. "What makes you think they will solve it now?"

Chinese officials have signaled confidence that tackling Hong Kong's structural issues will be easier with loyalists firmly in charge. That is despite failures by successive Beijing-anointed leaders in Hong Kong to remedy such problems since Britain returned the city to China in 1997.

Under Beijing's new approach, if those governing Hong Kong "can't serve the people well, they must step down," Tian Feilong, a Beijing-based professor and member of a Chinese government-backed think tank on Hong Kong policy, wrote this month.

The Hong Kong government declined to comment on whether discussions on policy reforms were under way.

Beijing telegraphed concern over social inequities last year, when Luo Huining, director of the central government's liaison office in the territory, visited the home of an unemployed worker during the Mid-Autumn Festival and said he felt deeply sorry about living conditions there.

Hong Kong's Gini coefficient, a measure of income inequality scaled from zero to one, whereby zero represents complete equality, ranks among the highest in the developed world, rising to 0.539 in 2016 from 0.518 in 1996, according to government data. The city has been ranked the world's least-affordable housing market in an annual international housing-affordability study by U.S.-based research firm Demographia for 11 straight years since 2011, when Hong Kong was first included in the analysis.

Hong Kong's low-tax regime, largely unchanged since British rule, doesn't impose any duties on sales, consumption, capital gains, dividends or inheritance. About half of Hong Kong's workforce don't pay tax, and the top salaries-tax rate is 17%, according to government data.

Options for making the tax system more equitable or funding more social welfare could involve revamping how personal income is taxed, said Michael Littlewood, a law professor at the University of Auckland who wrote a book on Hong Kong's tax system. For instance, existing tax categories -- which cover salaries, business profits and property -- could be revamped to create a broader system that taxes individuals' overall income.

If officials are more concerned with funding higher social spending, they could raise revenues significantly by imposing a goods-and-services tax, but this measure would be regressive and unpopular as lower-income households devote a larger share of income to consumption, Mr. Littlewood said. In 2006, authorities dropped plans for such a tax amid public opposition.

In February, Hong Kong unveiled its first stamp-duty increase on stock trades since 1993. The trading-tax increase, to 0.13% from 0.1%, was meant to buttress government spending for helping residents weather the pandemic, but spurred a local market selloff.

Hong Kong has sustained its low-tax system thanks in large part to its land policies, another legacy of British rule, which have long been criticized for artificially inflating real-estate prices that boost government coffers and developers' profits. Property experts say this system effectively imposes shadow taxes on residents through sky-high housing prices and rent.

From 2004 to 2019, homeownership rates in Hong Kong fell by 4.5 percentage points to just under 50% -- well below levels in other affluent economies -- while apartment prices surged nearly fourfold, according to a paper published this month by the Hong Kong legislature's research office. Younger residents are "priced out from the market, as their working income lags far behind the escalation in asset prices," it said.

Among ideas being considered by Beijing are speeding up government processes for rezoning land and approving projects, according to the people familiar with the discussions.

Li Shan, a veteran banker and member of a Chinese government advisory body, told a policy forum in December that he has submitted a proposal to Hong Kong authorities on ways to tackle housing issues, including setting up a public-private partnership to build new homes.

"Hong Kong's housing crisis is a problem of policy and not a shortage of land," the Real Estate Developers Association of Hong Kong said in a 2020 report, which cited regulatory logjams as a major problem. It proposed simplifying and expediting processes for rezoning land, among other suggestions.

Such changes could see officials take on the city's influential property tycoons, who have wielded outsize influence over land policy.

"The local tycoons need to think from the overall picture," said a government official familiar with the policy discussions. "Their interests will certainly be harmed to a certain degree, but the government doesn't want to eliminate them."

Write to Keith Zhai at keith.zhai@wsj.com and Chun Han Wong at chunhan.wong@wsj.com

 

(END) Dow Jones Newswires

March 15, 2021 09:22 ET (13:22 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.

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